Increasing evidence points toward the role of the extracellular matrix, specifically matrix metalloproteinase 9 (MMP-9), in the pathophysiology of psychosis. MMP-9 is a critical regulator of the crosstalk between peripheral and central inflammation, extracellular matrix remodeling, hippocampal development, synaptic pruning, and neuroplasticity. Here, we aim to characterize the relationship between plasma MMP-9 activity, hippocampal microstructure, and cognition in healthy individuals and individuals with early phase psychosis. We collected clinical, blood, and structural and diffusion-weighted magnetic resonance imaging data from 39 individuals with early phase psychosis and 44 age and sex-matched healthy individuals. We measured MMP-9 plasma activity, hippocampal extracellular free water (FW) levels, and hippocampal volumes. We used regression analyses to compare MMP-9 activity, hippocampal FW, and volumes between groups. We then examined associations between MMP-9 activity, FW levels, hippocampal volumes, and cognitive performance assessed with the MATRICS battery. All analyses were controlled for age, sex, body mass index, cigarette smoking, and years of education. Individuals with early phase psychosis demonstrated higher MMP-9 activity (p < 0.0002), higher left (p < 0.05) and right (p < 0.05) hippocampal FW levels, and lower left (p < 0.05) and right (p < 0.05) hippocampal volume than healthy individuals. MMP-9 activity correlated positively with hippocampal FW levels (all participants and individuals with early phase psychosis) and negatively with hippocampal volumes (all participants and healthy individuals). Higher MMP-9 activity and higher hippocampal FW levels were associated with slower processing speed and worse working memory performance in all participants. Our findings show an association between MMP-9 activity and hippocampal microstructural alterations in psychosis and an association between MMP-9 activity and cognitive performance. Further, more extensive longitudinal studies should examine the therapeutic potential of MMP-9 modulators in psychosis.